Germany’s Ifo institute slashes 2021 GDP growth forecast to 2.5% By Reuters

© Reuters. FILE PHOTO: : Staff wear protective masks at the Volkswagen assembly line in Wolfsburg, Germany, April 27, 2020. Swen Pfoertner/Pool via REUTERS/File Photo

By Michael Nienaber

BERLIN (Reuters) -Germany’s Ifo economic institute has cut its growth forecast for Europe’s largest economy for this year as supply chain disruptions and a scarcity of chips and other intermediate goods are slowing down the recovery from the COVID-19 pandemic.

The institute now sees Germany’s gross domestic product (GDP) growing 2.5% this year, down 0.8 percentage points from its previous forecast, and 5.1% next year, up 0.8 points.

The weaker-than-expected rebound in 2021 follows a plunge of overall economic output by 4.6% in 2020 caused by coronavirus restrictions on public life and business activities to contain the spread of the highly infectious disease.

The reduced growth forecast also shows that Germany’s next coalition government will inherit a still-fragile recovery from Chancellor Angela Merkel who is stepping down following a Sept. 26 election, after 16 years in power.

“The strong recovery from the coronavirus crisis, originally expected for the summer, is further postponed,” Ifo chief economist Timo Wollmershaeuser said.

“Industrial production is currently shrinking as a result of supply bottlenecks for important intermediate goods. At the same time, service providers are recovering strongly from the coronavirus crisis,” Wollmershaeuser added.

In a separate forecast, Germany’s association of private sector banks (BdB) gave a more optimistic growth outlook for 2021. It expects GDP growth of 3.3% this year and 4.6% next year.

The government, which so far has been forecasting growth of 3.5% for this year and 3.6% for next, will update its estimates in October.

“The biggest risks causing uncertainty for the outlook are the increased number of coronavirus infections and significant delivery and production bottlenecks which are particularly affecting German industry,” the BdB said.

Strong demand from abroad and robust private consumption at home are nevertheless expected to drive the recovery this year and next.

“We expect private consumption to increase by 7% in 2022. That would be by far the strongest boom since reunification (in 1990),” BdB managing director Christian Ossig said.

The problem of “compulsory saving” caused by coronavirus restrictions seems to be a thing of the past, with the catch-up effects continuing well into next year, Ossig added.

Ifo’s Wollmershaeuser said annual consumer price inflation in Germany could reach nearly 5% later this year due to pandemic-related special factors such as a temporary VAT cut in the second half of 2020 which was affecting comparisons.

But inflation would ease again in 2022, showed a prediction shared by the BdB banking association, which expects euro zone inflation to jump to 2.1% this year and slow to 1.6% next year.

“The ECB will therefore in all probability keep key interest rates low until at least 2023. For the banks, this also means that they will continue to have to bear high negative interest rates,” the association said.

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